All of the above? All of the above?\images\insights\article\electricity-pylons-small.jpg March 25 2022 March 25 2022

All of the above?

The U.S. must pursue a dual-track energy policy.

Published March 25 2022

Bottom Line

Russia’s unjustified and unprovoked invasion of Ukraine has been raging for more than a month now with no end in sight. Crude oil prices (West Texas Intermediate, or WTI) had nearly tripled from $34 per barrel in November 2020 to $92 in the 16 months prior to Russia’s nakedly aggressive land grab, which started on February 24. But over the past four weeks, crude has been on a roller coaster, spiking to $130 per barrel in early March, falling to $94, and rallying back to $115 this week. Lagging gasoline prices have more than doubled from $2.11 per gallon in November 2020 to a record $4.33 a fortnight ago. As a result, nominal CPI inflation surged from 1.2% in November 2020 to a 40-year high of 7.9% in February, a level we expect to soar to 9-10% in coming months due to Russia’s invasion.

Russian energy sanctions No one wants to engage in a shooting war with Russia, potentially triggering a nuclear or chemical response from Putin. But to ensure energy security, punish Russia and attempt to force an end to the war, the U.S. has ceased purchasing 700,000 barrels per day of crude oil from Russia, which accounted for 4% of our daily consumption. Europe has much greater energy dependency, as Germany purchased 55% of its natural gas from Russia, with the rest of Europe getting 40% of its natural gas from Russia.

Russia is one of the three largest energy producers in the world (along with the U.S. and Saudi Arabia), producing 10 million barrels per day, half of which they export. The oil-and-gas sector accounts for 40% of Russia’s government revenues, which they have been using to fund their war against Ukraine. Germany has already frozen their Nord Stream 2 pipeline project with Russia, which would have doubled the flow of natural gas into the country. But as the largest energy producer in the world, the U.S. needs to step up and demonstrate some global leadership, filling that Russian energy void both here and abroad to limit Russia’s economic influence. 

Americans on board According to a recent Wall Street Journal poll, 79% of Americans support sanctioning energy purchases from Russia to punish them for their war. Not surprisingly, however, they are equally unhappy with paying twice as much for gasoline and suffering the deleterious economic consequences of higher inflation and lower economic growth. This morning’s University of Michigan Consumer Sentiment Index, for example, saw confidence plunge to an 11-year low of 59.4.

Energy “Marshall Plan” This past week, 16 top CEO’s from energy and financial service companies met with President Biden and other administration officials in the White House, to share their ideas on how to better manage the crisis. They proposed increased natural gas production in an environmentally responsible way to increase American and European energy security, and to build additional liquified natural gas facilities in Europe, among other ideas. 

But this is contrary to the Biden Administration’s climate polices to date (bans on the Keystone XL pipeline, drilling in Alaska, fracking on federal lands and offshore drilling, and an accelerated transition to electric vehicles), which have contributed to a 15% reduction in U.S. energy production from 13 million to 11 million barrels per day. 

Rather than address the root causes of the global supply/demand imbalance and soaring energy prices, Biden has seemingly been more focused on temporary solutions, such as:

  • Releasing 40 million barrels of oil from the Strategic Petroleum Reserve 
  • Contemplating federal and state gas tax holidays
  • Providing Americans with energy stimulus checks or gas tax rebates
  • Encouraging Saudi Arabia, Iran and Venezuela to sell us more oil, despite their nuclear ambitions and poor environmental and human rights records
  • Launch a Federal Trade Commission investigation into alleged price gouging of U.S. energy companies, and implement windfall profit taxes on them

Traditional energy solution A better plan, according to the American Petroleum Institute, is to unshackle our domestic energy production. This might include releasing permits for drilling on federal lands, leasing more tracts for offshore oil development, accelerating permits for energy infrastructure and rolling back legal and regulatory uncertainty. 

“It’s now clearer than ever what is at stake when anti-American energy policies make us and Europe more dependent on Russian oil and natural gas,” according to Rep. Cathy McMorris Rodgers (R-Wash.). “I continue to urge President Biden to restore America’s energy dominance. It’s our most powerful weapon against Putin.” 

Stay on track with renewables But that doesn’t mean we should abandon or slow our inexorable progress towards a clean energy future, which includes solar, wind, hydrogen and geothermal, among other clean technologies.

EVs tell the story We have 290 million gas-powered cars on U.S. roads right now, and only two million electric vehicles (EVs), which account for a miniscule 0.7% market share. But there’s no question that the pace of their sales growth over the next decade will far outstrip that of combustion-engine vehicles. However, gas-powered cars have an average useful life of about 12 years, and potential new EV owners have lots of concerns, including their high cost and limited availability, insufficient charging infrastructure in the U.S. and a relatively short-range driving capacity. 

We’re confident that these challenges will be successfully hurdled over time. Improved battery technology will lengthen the driving range, mainstream auto companies will increase production, vehicle costs will decline, and the country’s existing network of 150,000 gas stations will gradually add 500,000 or more fast-charging stations. The electric grid to power these charging facilities will be rebuilt, powered by clean technologies such as solar and wind, with clean dependable alternatives such as nuclear and natural gas. 

All of the Above While all of this likely describes our inexorable and utopian energy future over the next generation, it is decidedly not our state of existence today, in which the world is threatened by a nuclear-armed tyrant (Russia) whose delusional leader (Putin) believes that he will be welcomed into the next G-20 meeting. We need to prioritize our own energy self-sufficiency and fill the energy void in Europe now, breaking our collective dependency on Russia. But at the same time, we should continue to methodically develop and invest in our next-gen energy technology.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

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